The market is searching for direction. In the last two weeks we’ve had big moves in both directions resulting from political “noise”. Debt ceiling fears will remain subdued for a few weeks.
During December, investors gave DC the benefit of the doubt. They discounted the notion that after 18 months of inaction, politicians would be reckless enough to let our economy go over the cliff. The stakes are higher this time around and it is also inconceivable that politicians would allow our country to default. The debt ceiling clock is ticking, but we have a couple of weeks before it is an issue. The U.S. Treasury can finance our needs through February.
That means the focus will shift to earnings. Alcoa will kick the season off after the close today. They could cite economic growth in China and that would be bullish for the market. The PBOC has been easing and their government will increase fiscal spending under the new regime. China is one of the current market catalysts and they are projecting 7.5% GDP growth this year.
Major releases won’t start for another week. Revenues and profits will be relatively flat. The guidance will also be cautious ahead of the debt ceiling negotiations. Stocks should be able to hold their own.
Bond yields are at historic lows and Asset Managers are anxious to shift out of fixed income and into equities. They won’t chase this rally and they won’t aggressively buy until the debt ceiling has been extended.
In yesterday’s comments I explained why Republicans will eventually cave-in. The “can” will get kicked down the road and investors will rejoice. Stocks will move higher and we are likely to break through resistance.
In order for this scenario to play out in the next few weeks, earnings have to meet expectations and the rhetoric in DC needs to be constructive. I expect solid earnings, but the second part of the equation is unknown.
If Republicans dig their heels in and they demand serious spending cuts, the market will retreat. The more heated the debate, the bigger the decline. Eventually, politicians will find a watered-down solution as the clock runs out. Stocks will jump on the news and a two-year debt ceiling extension would fuel us to new highs.
Both scenarios result in higher stock prices. I would prefer to buy on a dip and that is why I am keeping my powder dry.
In December, it looked like the market didn’t care about the fiscal cliff. When the decision came down to the wire, we got a massive decline. Traders that waited until 2013 were rewarded with an excellent entry point. This pattern is likely to repeat.
The strongest companies announce early in the earnings cycle. Alcoa’s results will be decent, but they won’t spark buying. We are likely to drift lower this week and we should find support above the 100-day moving average (SPY $143). Decent earnings by strong companies will push the market a little higher.
I will closely monitor the comments out of DC. If the market breaks through resistance, it will do so on the notion that politicians will find middle ground. From my perspective, I can’t fully embrace that rally. I need to have concrete evidence that the debt ceiling has been extended.
History tells me that politicians won’t act until they are forced to. The debt ceiling extension will come down to the final minute. The stock market and the ratings agencies won’t like it. That pullback will provide an excellent buying opportunity.
I want to avoid the political noise and I am day trading. By now, you know my strategy. Monitor the first hour’s trading range. If we are below the low, short stocks and if we are above the high, go long. Maintain tight stops and don’t carry overnight positions. I have been able to capture all of the big moves on an intraday basis using this strategy and I don’t have overnight risk.
The price action is soft today and I believe we will drift lower. Stocks will try to fill in the gap from five days ago and we will find support above the 100-day moving average (SPY $143) next week.